Thursday 20 October 2011 02.35 EDT
First published on Thursday 20 October 2011 02.35 EDT

A fresh takeover bid for Yahoo in which Microsoft would play a lead role appears to be emerging following the company's latest set of disappointing financial results which saw both revenues and profits fall.

But it is only one of a growing number of buyout options coalescing around the company, including one being proposed by China's Alibaba, another by AOL's chief executive Tim Armstrong, and the possibility of a private equity buying believed to be under consideration by Jerry Yang, the co-founder and former chief executive who still sits on Yahoo's board.

The latest rumours, reported by the Wall Street Journal, suggest that Steve Ballmer's company would play the lead role in supplying cash for the buyout of the company, which is worth around $20bn (£12.8bn).

Microsoft is believed to be working with Silver Lake Partners and the Canada Pension Plan Investment board on a proposal.

"Under the proposal being discussed, Microsoft would put up several billion dollars of funding, with additional financing being arranged by banks," the Wall Street Journal said, quoting unnamed sources.

Silver Lake and the Canadian fund would provide the rest, though this would be less than Microsoft's contribution, the report said.

For Microsoft, acquiring a controlling interest in Yahoo – which it tried and failed to do in 2008 – could mean that it could push its Bing search engine towards profitability. At present Microsoft's Online Services Division, which houses Bing, spends about $2 for every $1 of revenue it brings in. In Yahoo's latest quarter, figures published by the company (PDF) show that Microsoft paid it $53m in "cost reimbursements"; Microsoft also only gets 12% of the net revenue generated on Yahoo properties, after "traffic acquisition costs" (TAC) – the price Yahoo pays to bring searches in – are paid.

That makes it almost impossible for Microsoft to profit even if search revenue goes up – and Yahoo's numbers show that search revenue after TAC for the third quarter fell by 13% to $374m. On the basis of fixed costs and falling revenue, Bing cannot make money from Yahoo except if Microsoft owns it, because that will cut out the shared revenue agreement and reduce its TAC.

At present though Microsoft in effect loses money on every Yahoo search.

Reuters has previously reported Microsoft and Silver Lake Partners, a buyout firm, were among a host of interested bidders.

Jack Ma, the founder and chief executive of Chinese ecommerce giant Alibaba, also reiterated his interest in buying Yahoo on Thursday.

"If the board is willing to sell, I'm interested. They've just got to let us know," Ma said at the AllThingsD event in Hong Kong.

However, Yang suggested at the AllThingsD conference in Hong Kong that the company had not ruled out any possibilities.

"There are plenty of options for it to work and there are plenty of options for shareholders to realise that," Yang told the AllThingsD event when asked about the possibility of selling Yahoo.

Yang and Tim Morse, who was appointed interim chief executive after Carol Bartz was fired in September, have been driving the strategic review process, sources said.

Reuters has reported that Yang is interested in a deal with private equity firms to take Yahoo private in part because he sees that as the best option for preserving his connection to the company.

But some potential bidders are being put off by Yahoo's demands for confidentiality in the bids, which would prevent them from discussing joint assaults on the company, according to sources.

Yahoo's advisers Goldman Sachs and Allen & Co told interested parties this week they must submit to a "no cross-talk" provision, part of a non-disclosure agreement that must be signed to gain access to Yahoo's sensitive financial data, the sources said.

The provision has irked several potential buyers, including private equity firms that had planned to jointly bid for Yahoo.

They have refused to sign the non-disclosure agreement, and one source went so far as to call the provision a deal-breaker.

The "no cross-talk" rule is aimed partly at keeping that competitive tension in the bidding process.

"The board is taking action that is not conducive to the process," said the source, who spoke on condition of anonymity.

Implementing a "no cross-talk" policy gives Yahoo more control over its strategic review. The company is not opposed to a joint bid, but it wants to encourage competition and avoid all the bidders forming one giant consortium, according to another person familiar with the situation.

"If they can control it, they can pair people up in a way so that you have a couple of consortiums," said the source.

"Whereas if they let everyone talk to everyone, it could very well be – given the size of the cheque – that you end up having only one buyer to bid on and then you have no tension in the auction."

A Yahoo spokesman declined to comment.

Over the past few weeks, private equity firms including Bain Capital, Silver Lake, Providence Equity Partners and Hellman & Friedman LLC have stepped up efforts to partner among themselves or with potential strategic buyers, such as Chinese e-commerce giant Alibaba or Microsoft.

AOL chief executive Tim Armstrong is also actively trying to sell investors on a deal with Yahoo, though that is viewed to be a very long shot.

Private equity firm Blackstone Group has also expressed interest in the Internet giant, said one of the sources. A Blackstone spokesman was unavailable for comment.

The Wall Street Journal also reported that some private equity firms were valuing Yahoo between $16 and $18 a share. By comparison, Microsoft offered as much as $33 a share, or $47.5bn, for Yahoo three years ago.

Yahoo shares rose 3.04% to close at $15.94 on the Nasdaq on Wednesday.

Given the poor lending environment and lukewarm interest from strategic buyers, a club deal involving at least two or more private equity firms is seen as necessary to getting a deal done, sources said.

But it would be hard for interested parties to put together an offer without access to detailed information on such things as the contractual agreements between Yahoo and its investment partners Alibaba and Softbank, or precise details of the search pact with Microsoft.

"The good news is there is a decent amount of information out there on Yahoo, but it is not at the level to do real due diligence," said the second source.

"You need to get under the covers there to peel back and see if the metrics are working in different business lines."

Financial information on Yahoo is expected to be circulated to interested parties this week.